in Re J. Kyle Bass ( 2021 )

CONDITIONALLY GRANT and Opinion Filed July 30, 2021
S In The
Court of Appeals
Fifth District of Texas at Dallas
No. 05-21-00102-CV
IN RE J. KYLE BASS, HAYMAN CAPITAL MANAGEMENT, L.P.,
HAYMAN OFFSHORE MANAGEMENT, INC., HAYMAN CAPITAL
MASTER FUND, L.P., HAYMAN CAPITAL OFFSHORE PARTNERS, L.P.,
AND HAYMAN INVESTMENTS, LLC, Relators
Original Proceeding from the County Court at Law No. 3
Dallas County, Texas
Trial Court Cause No. CC-17-06253-C
MEMORANDUM OPINION
Before Justices Schenck, Nowell, and Garcia
Opinion by Justice Schenck
In this original proceeding, relators J. Kyle Bass and entities associated with
him (collectively, “Hayman”) challenge the trial court’s application of the crime–
fraud exception to documents Hayman asserts are subject to the attorney–client
privilege. We issued a stay of the trial court’s order requiring production of these
documents, and we requested a response to the petition. After reviewing the parties’
briefs and the mandamus record, we have determined Hayman is entitled to
mandamus relief. We therefore conditionally grant the writ.
BACKGROUND
Real parties in interest United Development Funding, L.P. and related entities
(collectively, “UDF”) are the plaintiffs below. They sued Hayman for business
disparagement and tortious interference and asserted the various Hayman parties
conspired to commit these torts by spreading false and damaging information about
UDF to the public market, to UDF’s business associates, and to governmental
authorities, after acquiring short positions in UDF stock, with the objective of
driving down the price of UDF stock, which benefited Hayman’s short positions.
In response to discovery requests, Hayman produced a privilege log
designating certain documents responsive to the requests as being subject to the
attorney–client privilege. UDF challenged those designations. At the hearing on
UDF’s motion to compel production, the trial court determined Hayman established
a prima facie case of attorney–client privilege under Rule 503 of the Texas Rules of
Evidence. However, with respect to four categories of documents, consisting of 331
documents, the court ordered the appointment of a special master to conduct an in
camera review of the documents before determining whether they were privileged.
The special master found 326 of the documents were subject to the privilege.
UDF then sought production of 318 of those documents claiming they were
subject to the crime–fraud exception to the application of the attorney–client
privilege. More particularly, UDF claimed Hayman was engaged in a criminal and
fraudulent “short-and-distort” scheme that falls within the crime–fraud exception.
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The matter was assigned to a visiting judge who found UDF had “made a prima facie
showing of a contemplated crime or fraud” and found that “each of the 318
documents relates to and has a nexus with the Defendants’ underlying fraudulent or
criminal conduct.” Accordingly, the visiting judge ordered Hayman to produce the
documents.1
Hayman now seeks relief from those orders claiming the trial court abused its
discretion in applying the crime–fraud exception to the privilege.
AVAILABILITY OF MANDAMUS RELIEF
Mandamus is an extraordinary remedy that is available only in limited
circumstances. Walker v. Packer, 827 S.W.2d 833, 840 (Tex. 1992) (orig.
proceeding). Mandamus relief is available when the trial court abuses its discretion
and there is no adequate remedy by appeal. In re Deere & Co., 299 S.W.3d 819,
820 (Tex. 2009) (orig. proceeding) (per curiam).
Here, the trial court was required to interpret legal rules in making its
determination regarding the crime–fraud exception. Granada Corp. v. Hon. First
Court of Appeals, 844 S.W.2d 223, 225 (Tex. 1992) (orig. proceeding). Because
this mandamus proceeding arises out of the trial court’s interpretation of a legal rule,
our review is to be conducted with limited deference to the trial court. Walker, 827
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The visiting judge entered two orders in connection with the 318 documents. One is dated December
3, 2020, finding UDF made a prima facie showing of a contemplated crime or fraud by Hayman, and the
other is dated February 5, 2021, finding each of the withheld documents relates to and has a nexus with
Hayman’s underlying fraudulent or criminal conduct and ordering production of the documents.
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S.W.2d at 840.
Whether a clear abuse of discretion can be adequately remedied by appeal
depends on a careful analysis of the costs and benefits of interlocutory review. In re
McAllen Med. Ctr., Inc., 275 S.W.3d 458, 464 (Tex. 2008) (orig. proceeding) (citing
In re Prudential Ins. Co., 148 S.W.3d 124, 136 (Tex. 2004) (orig. proceeding)). If
an appellate court cannot remedy a trial court’s discovery error, then an adequate
appellate remedy does not exist. In re Dana Corp., 138 S.W.3d 298, 301 (Tex. 2004)
(orig. proceeding). Appeal is inadequate when a trial court erroneously orders the
production of privileged documents. In re Ford Motor Co., 211 S.W.3d 295, 298
(Tex. 2006) (orig. proceeding).
DISCUSSION
Hayman claims the documents the trial court compelled it to produce are
attorney–client communications and that UDF failed to establish the application of
the crime–fraud exception to the privilege afforded the communications.
The attorney–client privilege exists and has been a cornerstone of our legal
system for nearly 500 years because the interests protected and secured by the
promise of confidentiality are not merely significant, they are quintessentially
imperative. Paxton v. City of Dallas, 509 S.W.3d 247, 261 (Tex. 2017).
Safeguarding the privilege is important—indeed compelling—because the
consequences of disclosure are far from inconsequential. Id. Once information has
been disclosed, loss of confidentiality is irreversible. Id. The bell, once rung, cannot
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be un-rung, and neither dissemination nor use can be effectively restrained. Id.Indeed, the attorney–client privilege holds a special place among privileges:
it is “the oldest and most venerated of the common law privileges of confidential
communications.” United States v. Edwards, 303 F.3d 606, 618 (5th Cir. 2002). As
“the most sacred of all legally recognized privileges,” “its preservation is essential
to the just and orderly operation of our legal system.” United States v. Bauer, 132
F.3d 504, 510 (9th Cir. 1997).
The privilege rests on “the need for the advocate and counselor to know all
that relates to the client’s reasons for seeking representation if the professional
mission is to be carried out.” Trammel v. United States, 445 U.S. 40, 51 (1980).
“[T]he privilege exists to protect not only the giving of professional advice to those
who can act on it but also the giving of information to the lawyer to enable him to
give sound and informed advice.” Upjohn Co. v. United States, 449 U.S. 383, 390
(1981). The privilege’s purpose could not be more evident: “to encourage clients to
make full disclosure to their attorneys” and, in return, to allow clients to obtain full,
fair, and candid counsel. Id.; Fisher v. United States, 425 U.S. 391, 403 (1976). By
promoting “full and frank communications between attorneys and their clients,” the
privilege “promote[s] broader public interests in the observance of law and
administration of justice.” Upjohn, 449 U.S. at 389.
The crime–fraud exception to the attorney–client privilege renders the
privilege inapplicable “if the lawyer’s services were sought or obtained to enable or
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aid anyone to commit or plan to commit what the client knew or reasonably should
have known to be a crime or fraud.” TEX. R. EVID. 503(d)(1). The apparent
reasoning behind the inclusion of fraud in the exception is this: by keeping client
communications confidential pursuant to the attorney–client privilege, the attorney
whose client intends to commit the misrepresentation or concealment is complicit in
concealing the truth about the misrepresentation or concealment from its victim. In
re Tex. Health Res., 472 S.W.3d 895, 905–06 (Tex. App.—Dallas 2015, orig.
proceeding). In such a situation, the attorney’s silence affirmatively aids the client
in committing the misrepresentation or concealment; thus, the attorney–client
privilege does not extend to such communications. In re Gen. Agents Ins. Co. of
Am., Inc., 224 S.W.3d 806, 820 (Tex. App.—Houston [14th Dist.] 2007, orig.
proceeding).
As UDF recognizes, the crime–fraud exception cannot be routinely invoked.
For the exception to apply, the party seeking its application must first establish a
prima facie case of crime or fraud, showing a violation sufficiently serious to defeat
the privilege. Freeman v. Bianchi, 820 S.W.2d 853, 861 (Tex. App.—Houston [1st
Dist.] 1991, orig. proceeding). The prima facie case requirement is satisfied when
the party asserting the exception offers evidence establishing: (1) the elements of
fraud or crime and (2) that the fraud or crime was ongoing or about to be committed
when the privileged communication occurred. In re Tex. Health Res., 472 S.W.3d
at 905; In re Gen. Agents, 224 S.W.3d at 819. Once a prima facie case of crime or
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fraud is established, the court must then find some valid relationship between the
document in question and the prima facie crime or fraud. See In re Tex. Health Res.,
472 S.W.3d at 905.
UDF claims this Court’s decision in Hayman’s interlocutory appeal of the trial
court’s denial of its motion to dismiss UDF’s claims pursuant to the Texas Citizen’s
Participation Act (“TCPA”) establishes UDF made a prima facie case of a crime or
fraud. See Bass v. United Dev. Funding, L.P., No. 05-18-00752-CV, 2019 WL
3940976 (Tex. App.—Dallas Aug. 21, 2019, pet. denied) (mem. op.). In that
interlocutory appeal, this Court concluded UDF carried its burden under the TCPA
to establish a prima facia case for business disparagement and tortious interference.
Id. at *25. It did not conclude UDF established the elements of a fraud or crime,
declare when it might have done so, or what the role of counsel would have been.
Thus, UDF’s reliance on this Court’s earlier opinion and the law-of-the-case doctrine
is misplaced. Moreover, review under the TCPA favors the plaintiff and a liberal
construction of pleadings and evidence. When we consider the application of the
attorney–client privilege, the law favors the privilege. Thus, a determination at the
TCPA stage as to a prima facie showing does not automatically translate to a prima
facie showing for purposes of application of the crime–fraud exception to the
attorney–client privilege.
The exception UDF attempts to invoke is for crime–fraud, not crime–tort. In
re Gen. Agents, 224 S.W.3d at 820. Business disparagement is a tort separate and
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apart from fraud. It is a legal cousin of defamation, not fraud. See Forbes Inc. v.
Granada Biosciences, Inc., 124 S.W.3d 167, 170 (Tex. 2003) (“A business
disparagement claim is similar in many respects to a defamation action.”); see also
Tucker v. Fischbein, 237 F.3d 275, 288 (3d Cir. 2001) (“That reporters regularly
consult with in-house counsel to discuss potential liability for libel does not thereby
deprive those communications of the protection of the attorney-client privilege.”).
While both fraud and business disparagement may involve a misstatement, the
exception to the privilege does not extend to all torts that may involve alleged
misstatements. If the enactors of the rule intended a wide sweeping application of
same to any and all misstatements, we believe the rule would expressly state so.
UDF urges this Court to adopt the expansive view of the fraud exception to
the attorney–client privilege the El Paso Court of Appeals embraced in Volcanic
Gardens Management Co. v. Paxson. 847 S.W.2d 343 (Tex. App.—El Paso 1993,
orig. proceeding) (concluding “under the crime/fraud exception to the lawyer-client
privilege, ‘fraud’ would include the commission and/or attempted commission of
fraud on the court or on a third person, as well as common law fraud and criminal
fraud.”). We decline to do so and note that, notwithstanding certain language in the
Volcanic Gardens opinion, the El Paso court continues to apply the elements of
common-law fraud when determining the applicability of the crime–fraud exception,
rather than requiring proof of a false statement only. See In re Seigel, 198 S.W.3d
21, 28–29 (Tex. App.—El Paso 2006, orig. proceeding). Moreover, an expansive
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view of the exception would severely undermine the attorney–client privilege,
whose preservation is essential to the just and orderly operation of our legal system.
Paxton, 509 S.W.3d at 259.
In all events, Hayman’s posts that UDF contends are false are also public
record. There is no concealment issue here. And, because the statements are about
UDF itself, it has the ability to determine whether they were in fact false.
Application of the privilege would not in any way prevent UDF from discovering its
claim or proving its case if, as it contends, the posts contained untrue statements.
UDF asserts its contention that Hayman engaged in a “short and distort”
establishes a prima facie case of a crime, namely securities fraud. Yet UDF did not
set forth the elements of a securities-fraud claim and did not attempt to attribute
specific evidence to the elements of same. See In re Tex. Health Res., 472 S.W.3d
at 905. Thus, in addition to failing to meet its burden of establishing a prima facie
case of fraud, UDF failed to establish a prima facie case of a crime or otherwise
attempt to overcome its heavy burden of piercing the attorney–client privilege.
We conclude the trial court misapplied the law in this case and thus abused its
discretion in ordering Hayman to produce privileged documents.
Having concluded the trial court abused its discretion by ordering the
production of documents covered by the attorney–client privilege, we now consider
whether Hayman has an adequate remedy by appeal. Because Hayman would be
forced to produce privileged information, we would not be able to cure the trial
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court’s error and Hayman would not have an adequate remedy by appeal. In re
Weekley Homes, L.P., 295 S.W.3d 309, 322 (Tex. 2009) (orig. proceeding)
(“Mandamus relief is available when the trial court compels production beyond the
permissible bounds of discovery.”).
CONCLUSION
Because the trial court abused its discretion in ordering Hayman to produce
privileged communications, and because Hayman does not have an adequate remedy
by appeal, we order the trial court to vacate the December 3, 2020 Order on Crime–
Fraud Motion and the February 5, 2021, Order Granting Plaintiffs’ Motion to Obtain
Documents Improperly Designated as Privileged Pursuant to the Crime–Fraud
Exception. Because we assume the trial court will comply with this opinion, we
direct our clerk not to issue the writ of mandamus unless information is received that
the district court has not so complied.
We lift the stay issued by this Court on February 12, 2021.
/David J. Schenck/
DAVID J. SCHENCK
JUSTICE
210102F.P05
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